Wednesday, September 14, 2011

Do Taxes on the Rich Raise More Revenue?

"The debate over taxing the rich in the U.S. seems to center on “fairness” – who pays too much or too little. Yet there is little discussion about a more immediate question: Would it raise the expected revenue?

Great Britain’s recent experience may be instructive. The U.K. is imposing a new tax rate of 50% for those making £150,000 a year (about $236,000). There is a fierce battle between British Chancellor George Osborne, who wants to scrap the tax, and many Liberal Democrats, who want to preserve it.

The Chancellor has asked for a study to find out how much revenue the tax has raised, though hard numbers won’t be available until next year. It was expected to raise £2.7 billion a year.

A report from Britain’s Institute for Fiscal Studies said the tax is costing the treasury £500 million a year, instead of earning billions. The reason: High earners are simply finding ways to avoid the tax. Top earners are hiding income or moving their earnings offshore.

“It looks like the 50% rate may be too high and that it is possible it will reduce tax revenues,” Paul Johnson, director of the IFS, told the Telegraph."

Buddy,I wouldn't disagree that the mortgage deduction is one that $500,000+ home buyers need (at least in Texas..that wouldn't buy you a mansion in CA or NY) but, if you take that away, many folks like me would rent and put that money somewhere that is more likely to give me a less risky return (and a lot fewer pains in my a$$).

It'd be interesting to see how many home-related businesses would cease to exist without that incentive. I'm sure there'd be fewer school districts and less suburban government.

Buddy,It's pretty hard to justify the subsidizing of a personal mansion. I just hope they'd take area home prices into consideration....wouldn't hurt us here, but it would be tough to be a first-time buyer on the coasts without that deduction....even in the range you describe

WSJ: A report from Britain’s Institute for Fiscal Studies said the tax is costing the treasury £500 million a year, instead of earning billions.

That doesn't appear to be correct. From the report: "The £2.4 billion the government expects to raise from the 50% rate is very small compared to the £496 billion the government expects to raise in total this year." In other words, the increase tax will raise about £500 million, just not nearly as much as the government had projected.

By the way, the report indicates that "the current 40% rate is already generating the maximum government revenue." 40% is the peak of the Laffer Curve. Furthermore, the study suggests that if the government closes a couple of loopholes, then more money will be subject to the 50% rate and revenues will increase.

James Browne, Taxing the rich - can it raise any money for the government?, Economic Review 2010.

the biggest tax reducer for the middle class is not mortgage loans but kids.

the vast majority of people who don't pay Federal Income taxes - do so because of exemptions, deductions and credits for kids.

if you take away those - you'll generate significant additional revenues.

each kid in the US costs taxpayers about 15-20K... if you count the exemptions, deductions, and credits along with the local and state school costs - and not including food stamps, subsidized lunches or MedicAid/SCHIPS.

so... people don't believe we can successfully tax the rich even as much as they were taxed under Clinton?

Mike: I've posted it on here before, but my sister actually quit her job because her combined income put her in a tax bracket that the take-home wasn't worth the pressure and time of the job.

That wouldn't be correct in most countries. In the U.S., income taxes are based on marginal rates. The higher rate only applies to the additional income. If your gross is higher, then your net income after taxes will always be higher. It's possible her withholding was not done correctly, but that should have been rectified when she filed her taxes.

It's pretty hard to justify the subsidizing of a personal mansion. I just hope they'd take area home prices into consideration

No harder than it is to justify subsidizing the purchase of any house.

BTW, I don't know why you think home businesses would stop. In fact, having a home business would still be great. The home office deduction remains. All you have to do is set up an LLC, pay off their non-deductable mortgage, take out a HELOC in the amount of the mortgage, invest that loan into your business and PRESTO, the interest is completely deductible because it's invested in your business.

In fact, since interest is deductible on only the first $1MM of your mortgage, the HELOC invested in your business is even better.

Also, the truly wealthy almost never take out mortgages. Most really expensive houses (in the $5MM and above range) are bought for cash.

So, as usual, this will ensnare the merely well to do and about average (depending on where you live).

And, Mike, you know they won't take cost of living into account. In NYC $250K doesn't even buy you an American middle class lifestyle, but they didn't that into account in the income tax code. Imagine the complexity of figuring out which area should get which tax rate.

No, my friend, it'll be a typical one size fits no-one government imposition.

“take out a HELOC in the amount of the mortgage, invest that loan into your business and PRESTO, the interest is completely deductible because it's invested in your business”

You probably know more about this than I do, but I’m not sure that the interest would be completely deductible. I got this from the IRS website:

“Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses”

http://www.irs.gov/newsroom/article/0,,id=108138,00.html

So it may be that only a small portion of the total interest expense would be deductable.

^^^^^^^^^^^^^^^^^^^^

The home mortgage deduction will probably not be eliminated. But if it were, I’m sure that new loopholes would spring up somewhere else in the code.

Regarding M.J. Perry's issue about the extent to which raising the top marginal rate will increase total IRS revenue, I think that only a small fraction of the predicted revenue will ever materialize.

It's actually conceivable that Obama knows this (though unlikely). For Obama, I think it's actually far better to have this as an issue to get voters out to the polls, than to actually get the tax increase that he seeks. Once the higher rate is in place, everyone will then see how ineffective it is; better to just use it as an issue to get (dumb) voters out to the polls on election day.

That's right! And, they deserve to be punished for not being more productive. The rich, who have proven their value to society by providing a lot of benefit for the rest of us, deserve to be rewarded with lower tax rates.

“Generally, the amount you can deduct depends on the percentage of your home used for business. Your deduction for certain expenses will be limited if your gross income from your business is less than your total business expenses”

This refers only to businesses losing money and would has to do with expensing things like lawn care and maid service that you apportion to your business. Direct business expenses such as financing costs remain fully deductible. I remind that the HELOC must legitimately be invested in your business, which should ideally be an LLC.

The IRS wants to make sure you've not set up your LLC simply to shelter income and it will only take issue with it if it thinks it has a strong case. The IRS loses in court a lot and every time they do, they can interpret the rule in question less broadly. That reduces their power. They don't like that.

Emil: I guess you do realise that the two statements below cannot be simultaneously true?

You are right, and we had misread the report's statement. We were looking for the claim that the report stated that the increased tax resulted in lower revenues. Apparently, the WSJ was reading one of the charts, and the actual revenue depends on the elasticity. In addition, the report indicated that changes in loopholes could move the peak on the Laffer Curve. On the other hand, people may just move their operations to a tax friendly country. Here's a more relevant quote:

"Even if the government is right about the taxable income elasticity, if the very rich reduce their expenditure by as much as their taxable income, the government will raise about£0.9 billion; £1.5 billion less than they expect from this measure."

Still, borrowing against your primary residence for business purposes may not always be considered prudent. No one is omniscient about market conditions, though if the business is one of long-standing, or based on professional qualifications, it is will be less risky.

morganovich: all this "tax the rich more" policy is just nonsense. it does not create more revenue.

The graph your source provides is not very clear. If you look at the Clinton tax rates, taxes as a percentage of GDP rose 3 points (from 17.5% in 1992 to 20.6% in 2000), which was significant enough to bring the budget into balance, with enough for the scheduled payments to Social Security. Today, at about 15% of GDP, taxes are at the lowest point in 60 years. http://blogs.reuters.com/felix-salmon/files/2010/12/US_TAXGDP1210.gif

I agree - NO. Think of Warren Buffett - if taxes were raised, wouldn't he continue to pay his accountants significant funds to REDUCE his tax liability? YES he would. With increased tax rates, additional tax strategies become more efficient for him to employ.

The best solution is a simple flat tax across all people. Reduce complexity, and reduce government.

the 2000 peak had to do with capital gains etc from the internet bubble.

it dropped significantly in 2001 with the bust.

go back and look at the other changes.

big drops in the top rate did not reduce income either.

why would you suspect that drops would have no effect but that increases would?

the current rates are a bit of a departure, but most of that move is due to unprecedented cuts in fica piled on top of the typical decrease in a recession piled on top of the drops you get after any big market bust as loss carryforwards are worked off.

it has little to do with top marginal rates, which have been stable for a decade.

if i make 20X the average, i pay 20X that taxes for the same government.

no other good or service works that way.

if bill gates and i each buy the same hammer at home depot, we pay the same for it. that is flat.

people like to trot out this argument that the rich "get more" from government, but it's simply not true.

they get less.

they don't use social programs etc.

the argument that they got more benefit from laws etc because they made more money is easily shown to be ridiculous.

if i walk into a grocery store with mario battali, and we each buy the same ingredients to make linguine with clam sauce, and he makes a stunning dinner that sells for $35 and i make some mediocre fare that's worth $10, should he be charged 3.5X what i paid for the ingredients because he sued them better and created more value?

wouldn't that pretty much destroy incentive to create value?

why should government be treated differently?

this example gets even starker if we look at prices for consumption.

if you earn $100k and i earn $50k and we go to burger barn for dinner, if they charge us based on income (like a flat tax) i pay $5 and you pay $10.

That's right! And, they deserve to be punished for not being more productive. The rich, who have proven their value to society by providing a lot of benefit for the rest of us, deserve to be rewarded with lower tax rates. Social Darwinism at its finest.

Still, borrowing against your primary residence for business purposes may not always be considered prudent. No one is omniscient about market conditions, though if the business is one of long-standing, or based on professional qualifications, it is will be less risky.

If you have a mortgage, you are effectively doing the same thing - taking out loan with the expectation of paying it back from future income. There's no additional risk switching out a loan called a "mortgage" for a loan called a "HELOC". There's no economic difference, just an accounting difference.

"May as well point out that the higher marginal rates did not unduly inhibit growth, and the expansion was broad-based."

what's your evidence for that?

growth would have been higher with lower taxes.

you can say, well, leaving the window open did not make it unduly cold in here because we had a huge fire in the fireplace, but that hardly demonstrates that open windows do not cool rooms.

the technology/internet boom of the late 90's was one of the great economic phenomena of the post ware era.

it was an engine so strong it could mask a multitude of policy sins.

lance Armstrong can ride a bike quite rapidly, even with the brake rubbing the wheel, but to argue that he would not go faster if it wasn't is absurd.

can you seriously believe that taxes do not inhibit economic activity? that lower ROIC's drive investment? that lower wages make you more anxious to work and that lower take home pay increases consumption, savings, and investment?

the only way that could work is if government were better and spending and allocating money that individuals.

i am unaware of any evidence to that effect, and of piles showing it to be far worse.

I'm surprised that the disussion here has not turned to Obama's "jobs plan". In this plan, we will cut taxes on the steepest part of the Laffer curve and raise taxes where the curve has likely turned down. In other words, we lose revenue on both ends.

i bought my house for cash (and at a very low price) so it will likely make money.

however, i then realized that there was a great rate arbitrage. i took out a $417k mortgage at 2.7%.

if i can beat that return investing, then it's a good source of funds.

with rates at 7%, i'm not sure it would be that attractive, but a cost of capital in the 2% range makes for many more attractive strategies.

even if i just bought 30 year US treasuries and levered them up 3:1, i'd be getting about a 7% spread on the carry and getting to write off the interest in the meantime which takes it to closer to 9% after tax with the added bonus of duration mismatch. (write off now, pay tax in 30 years)

First published Sep 14 2011 06:13PMUpdated Sep 14, 2011 11:52PMBack in 1997, Bill Clinton began his second term as president. The first Harry Potter novel appeared. Gasoline cost $1.30 a gallon. The median household income in Utah was $57,938 in 2010 dollars.

Now, 14 years later, Utah’s median income has dropped below that level. In 2010, it was $56,787, or $1,151 lower than in 1997, according to census data released this week.

---30---

So even in rosy-cheeked Utah, where there are no lazy inner-city baggy-panters, median income is falling.

Can't say we should tax the middle-class any more.

It may be the upper-upper class has reached the backward-bending part of the work and investment curve. They are so rich they don't really need to hustle anymore. Like the ballplayer who just inked a $200 million contract. You think he is going to slide hard into second and break up the double-lay?

morganovich: but unemployment also dropped to 4% and average incomes spiked, so yes, it was the boom.

Of course it was a boom. And though there was some overvaluation, most of the increase in GDP and incomes was based on real innovation and economic growth.

morganovich: it had nothing to do with tax rates, which had been stable for a decade.

Well, in 1993, the Clinton Administration said that raising taxes a bit would reduce the deficit and that this would free up capital for investment. Meanwhile, Gore had completed a long process of privitizing the information superhighway. Republicans nearly all said raising taxes would crash the economy and not one voted for the bill. What resulted was the longest peacetime expansion in history.

morganovich: as you can see from your own chart, tax receipts were in decline years before any tax cuts.

The tax cuts were immediate to 2001. Revenues peaked in 2000. (A small temporary tax cut as a stimulus would have been appropriate.)

morganovich: they then bounced back as the economy stabilized/recovered, but were headed up for the first several years of the bush tax cuts.

Yes, the housing boom which led to catastrophe.

Methinks: There's no additional risk switching out a loan called a "mortgage" for a loan called a "HELOC".

The risk is borrowing additional sums against your primary residence.

morganovich: growth would have been higher with lower taxes.

That's right. The economy would have overheated more than it already did. If anything, the markets needed to be tempered somewhat.

* Require hiring be done for US citizens on a more permanent basis. Temporary labor costs multiply per level of indirection - three levels of subcontracting mean 3x liabilities that cannot be passed to the worker. Direct, FT, non-temporary labor incurs a large tax cut.

* Ban the discrimination against the long-term unemployed, with a very low bar of proof.

* Remove all the regulation that allows the immigration of H1-b's/L-1's/etc. It only encourages fraud by business and does not create US jobs.

* Require the early, public, and widespread disclosure of any plans/drafts/actions to go offshore/to use offshore labor for any size organization.

* Nullify any tax credits for going offshore, and remaining assets must remain in the US under a wholly US-controlled entity if a complete move offshore.

* Allow for the pursuit, capture, and automatic RICO classification of those who do not go by the above.

Businesses want everyone else to do the sacrifices. If they want a tax cut, they have to be willing to follow through with jobs instead of just taking it offshore and wanting more.

"Well, in 1993, the Clinton Administration said that raising taxes a bit would reduce the deficit and that this would free up capital for investment. Meanwhile, Gore had completed a long process of privitizing the information superhighway. Republicans nearly all said raising taxes would crash the economy and not one voted for the bill. What resulted was the longest peacetime expansion in history."

the key to that is the word "privatization"

higher tax rates did not do anything for revenues.

it was the internet boom.

look back at all the tax cuts that did not decrease revenues as a %. there are 4 or 5.

the drop in 2001 was from the bust, just as in every other recession. tax revs quickly recovered.

there is simply no correlation between top marginal rates and revenues.

it's all GDP and employment.

arguing that federal deficits are an issue may well be so, but the answer is lower spending, not more taxes.

"Yes, the housing boom which led to catastrophe. "

this is a non sequitor. that was caused by wildly loose fed policy colliding with irresponsible federal programs (like CRA and freddy and fannie) it has nothing to to with tax rates.

"That's right. The economy would have overheated more than it already did. If anything, the markets needed to be tempered somewhat."

that is not the case.

lower taxes would have favored income and sustainable consumption as opposed to investment. tax rates are not a good instrument to try to temper the business cycle. that is the job of interest rates (if it's anyone's job at all).

upping the marginal tax rate just favors investment by increasing the tax spread. it makes a bubble more likely, not less.

I've long thought Y2K was a major culprit for the bust that happened pretty much right after Jan 1, 2000. In the late 90's, pretty much every company on the planet was furiously upgrading hardware,software, and hiring tech workers to head off what they thought was electronic armageddon. And tech companies couldn't fill orders fast enough.

All that came to an abrupt end in Jan 2000, and so the mass layoffs began as business was all caught up, no need to buy any more equipment from Cisco, Dell, Microsoft, etc....

Methinks: Do you not understand what switching one type of loan for another means,

Yes, but we may be confused on what you advocate. You seem to be referring to a home business and a home with a mortgage. You pay this off, set up an LLC which then borrows the same amount against the home. Is that correct?

morganovich: the key to that is the word "privatization"

Yes, privatization was an important component of Gore's advocacy.

morganovich: higher tax rates did not do anything for revenues.

Earlier you said it was due to capital gains. Did you abandon that position, or are we left to guess?

Thanks. Sometimes I get so tired of hearing "Tax The Rich!" I just can't help myself. :) Ha! :) I get that, I guess. I just happen to believe the correlation between amassed wealth and value given to society is a little looser than you do, I guess. And the more we idolize wealth in abstract, the looser the correlation gets.

Indira Gandhi: "My grandfather once told me that there were two kinds of people: those who do the work and those who take the credit. He told me to try to be in the first group; there was much less competition." I happen to believe there's a similar relation between work and money.

"I just happen to believe the correlation between amassed wealth and value given to society is a little looser than you do, I guess. "

Allow me to re-word that slightly, and tell me if you agree with the slight difference I think it makes:

"I just happen to believe the correlation between amassed wealth and giving society what it values is a little looser than you do, I guess."

The difference, if there is any, is that individuals in society can determine on a case by case basis what that value is, rather than society as a collective applying a predetermined scale to measure that value.

While I would never argue that life is fair, I do believe that wealth is created by those people who provide something to others that they value more than something they already have. In the process, those people are rewarded with a portion of that wealth.

The more that thing is valued by society, the wealthier the provider becomes.

The word "amassed" is also a little tricky. I picture someone having a large safe stuffed with $100 bills. In reality, whatever someone amasses is also a result of others providing value, and being rewarded for it.

That $10mn ocean view property provided a lot of benefit for material suppliers, builders, and many others.

The notion that wealth is unfairly distributed, and that something should be done to correct that injustice is BS. Pure class envy. "That's not fair, he has a cookie, and I didn't get one."

Most of the injustice, in my view, result from unentended consequences caused by misguided attempts to correct perceived inequality through use of the force of government.

Allow me to re-word that slightly, and tell me if you agree with the slight difference I think it makes:

I think both versions are true. It's true people look at NBA players' salaries and just go "What???!". The same is true about hedge fund managers. But I'm referring more to things like I see in my own company, where the path to a manager's success can be to gut your team to save costs, over-promise, under-deliver, blame others, ask for help, take the credit for someone else's "save", and move on before the team burns out leaves, or just fails. I can find analogs to this behavior in every company, on every stage, in every profession, at every level of abstraction: individual, company, division, government: take your pick.

The idea that wealth "must be redistributed to be more fair" is categorically wrong. But the idea that "I deserve what I have because I have it" is even more ludicrous. It's as bad a justification for capitalism as it was for the justification of an Emperor's rule. Using one's "success" as a means to look down upon others just bugs the hell out of me, because it's not only wrong but corrosive to Integrity and Honor: the real building blocks of civilization without which no contracts can be made, no property can exist, and free markets are a joke.

Methinks said..."If I was not scared of the Soviets, who viewed their population as disposable"

I just don't care for the business world to take that view. With the way offshoring and calls for business friendliness are being done, the private sector's goal is a disposable workforce - in ways that are not far from the Soviet interpretation.

Would you want a private sector that does the same thing the Soviets did? You only need to look at China and like Third World countries where the nominally private sector has that exact setup.

Freedom isn't something you give out just to "job creators" - it is something given to "job performers" and "job seekers" as well.

I;m sorry to hear the world you live in is inhabited by so many assholes. :)

It sounds like an unpleasant place.

I don't know that there's much I can say that would be helpful in that area.

But I can address this part:

" But the idea that "I deserve what I have because I have it" is even more ludicrous. It's as bad a justification for capitalism as it was for the justification of an Emperor's rule."

I don't know how many people say they deserve what they have because they have it, but I, among others, would say that I deserve what I have made, and it can't legitimately be taken from me.

If I make a net to catch fish, it is my property. If I trade my labor for a piece of paper that certifies that I have labored, it is mine, and I can then trade it for other things I want, and they are mine.

Others may have more or less than I do, but I don't owe any of what I have to those who have less.

"A report from Britain’s Institute for Fiscal Studies said the tax is costing the treasury £500 million a year, instead of earning billions. The reason: High earners are simply finding ways to avoid the tax. Top earners are hiding income or moving their earnings offshore."

**********************

We need tougher sentencing laws for these criminals who don't pay their taxes. The death penalty perhaps?

I'm sorry to hear the world you live in is inhabited by so many assholes. :) There are many good and bad people everywhere. If you're confident and secure, you can notice the good. If you're a natural idealist with a desire to please, a tendency to over-responsibility, not a lot of social common sense, and were indoctrinated early by Church high moral standards, you'll likely be more painfully aware of just how prevalent petty cruelty can be after years of blaming yourself for all the crap people dump on you. Trust is absolutely necessary, but if you trust anyone, you will be taken advantage of. I'm not whining: it's just one of those things.

If I make a net to catch fish, it is my property. If I trade my labor for a piece of paper that certifies that I have labored, it is mine, and I can then trade it for other things I want, and they are mine. I am thankful to live in a society where we honor that principle, at the first level of approximation. I've worked hard to get the things I have. But the idea that I "deserve" it, in the most complete sense...? I didn't earn my talent. No one owed me my scholarships, or even my elementary school education, or my speech therapy when I was younger. My parents didn't have to pay for my college, and the things they've given me they didn't owe me. My friend didn't have to help me get my job. I am successful at work partially because of the time, effort, and integrity of others, and they partially because of me. Since full attribution is a fool's game, "I deserve what I have" has a weak basis in every case I've examined. And if you haven't worked with people who don't deserve their pay, you haven't paid attention. Respect for boundaries, for contract, and for property is extremely useful, but the pride and indignation that tend to go with it are just vanity.

"I am thankful to live in a society where we honor that principle, at the first level of approximation. I've worked hard to get the things I have. But the idea that I "deserve" it, in the most complete sense...? I didn't earn my talent. No one owed me my scholarships, or even my elementary school education, or my speech therapy when I was younger. "

Nor did you ask for those things.

"My parents didn't have to pay for my college, and the things they've given me they didn't owe me. My friend didn't have to help me get my job. "

You are taking my position that people are generous, and are willing to help others when they see the need, and that government involvement isn't necessary. Parents, especially, help their children become successful and self sufficient adults. This is the role of a parent. A responsibility they accept gladly when they decide to become parents. Well - most parent do anyway.

Many children appreciate this love and selfishness and return it in later years when roles become reversed, and the parents are the ones needing help. This system has worked throughout human history, and still would if allowed to, but the recent developement of government intrusion into family life has nearly destroyed it.

To feel gratitude to parents, friends, and others is normal and natural, but to thank faceless others who have been forced to help you without wanting to, or even knowing who you are isn't necessary. You haven't asked them to do it, and you don't owe them anything. Someone else has decided on that arrangement for you.

"And if you haven't worked with people who don't deserve their pay, you haven't paid attention."

I have often done so, but that's just my opinion. The fact that they remain employed, means that my appraisal of them isn't the one that matters.

"Respect for boundaries, for contract, and for property is extremely useful, but the pride and indignation that tend to go with it are just vanity."

Not only usefull, but necessary for a free and prosperous society.

The indignation results not from the notion that others shouldn't be helped, but from the notion that what they have earned can be taken from them by force and used in ways they haven't chosen, for purposes they haven't chosen, and for the benefit of people they don't know exist, or may not wish to help.

The difference is choice.

In my opinion, government involvement in the welfare of individuals has caused them more harm than good.

"Even in the antebellum era, when slaves often weren’t permitted to wed, most black children lived with a biological mother and father. During Reconstruction and up until the 1940s, 75% to 85% of black children lived in two-parent families. Today, more than 70% of black children are born to single women. “The welfare state has done to black Americans what slavery couldn’t do, what Jim Crow couldn’t do, what the harshest racism couldn’t do,” Mr. Williams says. “And that is to destroy the black family."